Bitcoin Markets: Black and Gray, White and Red

The markets context of cryptocurrencies is changing in what may seem like a subtle manner but has real political consequences. One question is the pivot point. Should Bitcoin maintain the pseudonymity that offers privacy or should government identify users through such measures as imposing Know Your Customer (KYC) requirements on exchanges?

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The Price of Going Mainstream

The answer seems screamingly obvious: privacy! But the question keeps arising with disturbing frequency in the Bitcoin community where regulation has some strong advocates who believe it is a prerequisite of going mainstream.

Kevin Batteh is an advisor to the Chamber of Digital Commerce, the world’s largest trade association representing the digital asset and blockchain industry. He comments on the recent settlement between the Hong Kong-based bitcoin exchange Bitfinex and the US Commodity Futures Trading Commission. Batteh:

Businesses may loathe burdensome regulation, but they almost always welcome regulatory certainty, even if they are certain they don’t like the particular regulation. Regulatory certainty is predictable and allows businesses to comply with rules, to plan, and to avoid risks […]

A recent Coindesk headline regarding blockchain indicates the extent to which Bitcoin is being claimed by the mainstream: “90 Central Banks Seek Blockchain Answers at Federal Reserve Event.” The conference was hosted by the World Bank, the Intentional Monetary Fund and the US Federal Reserve – the archnemeses of free and decentralized currencies. The conference focused on adopting blockchain protocols, not regulation, but it is all part of the same drift.

Bitcoin is expanding from its original base of tech zealots and libertarian radicals into the world of crony capitalism and government control where regulation threats privacy. Fortunately, libertarian-leaning Bitcoiners are eloquent on this issue because pseudonymity is viewed as their main protection against government tyranny.

Andreas Antonopoulos, Bitcoin guru and author of Mastering Bitcoin, is typical in insisting “[p]rivacy is the right of billions of individuals not to be surveilled,” he insists.

Another aspect of coming change is less addressed: the entire market context of cryptocurrencies could shift significantly.

No one knows precisely what the founder(s) Satoshi Nakamoto intended to accomplish with Bitcoin but there are clear indications that it was meant to be an agorist currency; agorism is a political philosophy in which freedom is achieved through economically bypassing the state. Some early correspondence from Satoshi, which is maintained at The Cryptography Mailing List, contains echoes of agorism. Of Bitcoin protocol, he comments, “It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.”

When his correspondent observes, “You will not find a solution to political problems in cryptography,” Satoshi answers, “Yes, but we can win a major battle in the arms race and gain a new territory of freedom for several years. Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”

The Colors of Markets

It is safe to assume Satoshi wanted a decentralized currency that flowed in an extra-governmental manner with users protected by relative anonymity. It was no coincidence that Bitcoin flowed first and most freely through black and gray markets rather than through white or red ones. (The breakdown of the economy into these four markets is a characteristic of agorism.)

Black markets: “illegal” goods and services are exchanged in some manner. Some items violate the person and property of others, such as stolen credit cards. Most of them, however, are “illegal” only because a government says so; these include recreational drugs, smuggled or funds transferred despite capital controls. Authorities excoriate the black market as violence and use it to justify an ever-extended reach into the world of cryptocurrencies.

For Bitcoiners, however, the only relevant criticism should be if the “illegal” activity violates the rights of person and property – that is, if it is not peaceful.

Gray markets: legal goods and services are exchanged but they are acquired in a manner that is either illegal or unregulated by the state. Typical examples are brand-name electronics sold by unauthorized distributors, knock-off purses sold by street vendors or undocumented workers hired at a construction site.

White markets: legal goods and services are exchanged according to government regulations, taxes and all other requirements. Having a doctor prescribe a drug that you buy from a licensed pharmacist is an example.

Red markets: goods and services are “exchanged” in a legal, state-regulated manner but violence is part of the process. The confiscation of property by the police under civil forfeiture laws is an example.

Free Market Currency

Both black and gray markets express personal freedom and the free market; they are self-regulating and determined by individuals. Black markets can also express violence, of course, but it usually results from government policies such as the prohibition of alcohol or drugs. By criminalizing a good and absurdly hiking its price, the government drives out law-abiding players and encourages violent ones to fill the void.

Bitcoins are a perfect currency for the privacy upon which free markets thrive. The Wall Street Journal adds:

Cash is also the currency of gray markets—amounting to 20% or more of gross domestic product in some European countries—that governments would love to tax.

The subject of taxes returns us to white and red markets, both of which strengthen the government at the expense of individuals. Regulation and scrutiny may be justified in the name of a war on terrorism or on crime but it will be used against such fiscal “crimes” as tax evasion, money laundering, and the violation of capital controls. That’s the way of the state. In a vicious cycle, the regulations will strengthen the white and red markets which, in turn, will enable the government to pass more regulation. Lather, rinse and repeat.

The gray market would suffer most because it is populated by people who are willing to sidestep the law only on small matters, like repairing a neighbor’s plumbing for a fee. The black market would grow more violent, as it always does, in the presence of government repression. Cryptocurrencies may flourish in the sense of being more commonly used but that use will facilitate the government’s agenda, not Satoshi’s.

Hopefully, cryptocurrencies are so intrinsically resistant to regulation that the attempt is akin to caging an idea.

Do you think Bitcoin was meant to be an agorist currency? Let us know in the comments sections below!